Rarer than rare

I could try to open this post with references to song lyrics from either Toad the Wet Sprocket or Arctic Monkeys, but, either way, I’d likely lose most of you from the jump. (I could also try to claim knowledge of the Glenn Miller song that uses the exact phrase but while I may look it I’m just not old enough to know that reference.)

So, instead, we’ll go straight into the situation referenced by the title of the post. I’ve written in the past about the rare nature of instances of departures from law firms actually resulting in litigation and the rare nature of law firms suing other law firms over advertising practices. But what we discuss today is much rarer than either of those things, a corporation filing suit against its former general counsel for what is the equivalent of a claim for legal malpractice .

In the last few weeks there has been discussion in the legal press of a $70 million lawsuit filed by Hertz against three of its former high-level executives. One of those three defendants is Hertz’s former General Counsel. (He was also an EVP and Secretary but the lawsuit focuses only on his status as General Counsel so we shall do the same.)

So, what’s the deal? Well, Hertz has had some trouble over the years with the SEC where it ended up having to restate its financials for fiscal years 2011, 2012, and 2013. The restatement filing was made with the SEC in 2015 and amounted to a $231 million reduction in Hertz’s net income. The restatement was attributed to “material weaknesses” in Hertz’s internal controls which the lawsuit is claiming were either caused or made worse by the mismanagement of the company by the three defendants being sued, including the former General Counsel.

If you want to read a good summary treatment of the suit, you can grab one here or here. It certainly details a story of significant corporate turmoil and upheaval and paints a very unflattering picture of the former CEO (who is one of the three named defendants) and his management style. If you are interested in reading the full lawsuit filed in federal court in New Jersey, you can get it here.

If you want to get a clear flavor of the kinds of allegations involved without getting fully into the weeds – and in particular the almost “ride-along” nature of the case against the General Counsel – paragraph 6 of the Complaint is a pretty good landing point. (Frissora was the CEO; Douglas was the CFO; and Zimmerman is the General Counsel in question.)

Upon learning that Hertz might miss a financial target, Frissora would demand mandatory team-wide calls and continuous weekend meetings, and would repeatedly berate subordinates who did not come up with a sufficient number of “paradigm-busting” accounting strategies to fill the gaps between Hertz’s actual and expected performance, accusing them of not being team players if they would not play his game. Defendants Douglas and Zimmerman – Frissora’s right-hand subordinates who were entrusted with effectuating his orders — failed to stop, effectively counterbalance, or otherwise offset or report to Hertz’s board of directors . . . Frissora’s inappropriately forceful tone, in breach of their duties owed to Hertz.

The suit seeks to claw-back somewhere in the neighborhood of $70 million in incentive-based payments that were made to the three including significant amounts of money paid to each on their way out the door after they resigned and the financial problems had become known – payments that the lawsuit itself tags with the shorthand reference “Golden Parachutes.”

Paragraph 21 of the Complaint goes into the most details in terms of the allegations against the General Counsel. It does not, of course, reference the ethical duties that a lawyer to an organizational entity owed under RPC 1.13 but, at its heart, the dynamic that is discussed in that rule in most jurisdictions is exactly what this lawsuit is all about: the allegation that if Zimmerman wasn’t able to stop Frissora from engaging in wrongdoing he should have informed the Board of Directors of Hertz about what was going on.

Based on not much more than a very surface-level read, it is an extremely interesting story where I’d love to learn what the other side of it looks like. Given how rare this kind of lawsuit is, it would not be at all surprising for it to get resolved in a way that does not end up shedding light on whether the former general counsel’s story is one where he’s joined at the hip with the former CEO in a belief that everyone was trying to do the best thing for Hertz or if his story is one in which he wasn’t comfortable with what was going on but didn’t think he could rock any boats or somewhere in between. (One note of curiosity about the litigation and the dynamic, one of the two articles linked above goes into details about how the defendants in the New Jersey federal court suit have become plaintiffs in a suit filed in Delaware to seek to make Hertz pay them for the costs incurred in defending the suit Hertz has brought.)

At this point at least, and regardless of how any of it plays out further, the situation offers a ready highlight for lawyers who represent entities, and particularly in-house counsel, about how important it is to always remember that it is the entity that is the client – and not any particular officer – and how big the stakes can be when it comes to trying to figure out whether the person giving you instructions is acting in the best interest of that entity or not.

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